How should the after-tax impact of the foreign tax credit be calculated for a fund that either declares dividends or does not declare any dividends during the applicable period?
A. The instructions for computing after-tax returns state that the effect of the foreign tax credit should be taken into account in accordance with federal tax law.18 As a result, a fund that elects to pass through the foreign tax credit to its shareholders under Code Section 853 must include in the shareholders’ gross income for computing taxes the amount of the credit.19 For example, if a fund pays a cash dividend of $9.00 per share and a $1.00 per share foreign tax credit is being passed through with this dividend, the amount of the dividend is increased to $10.00 per share to reflect the foreign tax credit gross-up. The amount reinvested would be $6.09, which equals the $9.00 cash dividend, less tax of $3.91 on the $10.00 grossed-up dividend (assuming a 39.1% maximum marginal tax rate), plus $1.00 to reflect the benefit provided to the taxpayer by the $1.00 foreign tax credit. A fund that pays foreign tax but has no net income to distribute nevertheless may be eligible to pass thro
Related Questions
- How should the after-tax impact of the foreign tax credit be calculated for a fund that either declares dividends or does not declare any dividends during the applicable period?
- How should the after-tax impact of capital gains be calculated if the fund decides to retain them (rather than distribute them as a capital gain dividend)?
- How is the foreign tax credit affected by qualified dividends?
